A Farewell Address by the World Bank’s Most Outrageous Economist

By Donella Meadows

–February 3, 1994–

Six years ago, when the World Bank hired Herman Daly, those who knew his work were amazed. Daly is, depending on your point of view, either the most dangerous economist in the world, or the most visionary. For years he taught economics at Louisiana State and quietly wrote articles that stood much of economics on its head. Those who found those articles insightful and delightful didn’t think he would last a month at the staid World Bank.

To the credit of both Daly and the Bank, he lasted six years. Two weeks ago he left to take a professorship in ecological economics at the University of Maryland. The Bank graciously asked him to give a parting address, which he did, to a packed audience.

Daly is a gentle man. His speech was not thunderous. But if the assembled economists who heard it take it to heart, that speech could revolutionize the Bank, and the world.

The World Bank will be 50 years old this year; Daly will be 55. He wanted to use his seniority, he said, to “prescribe a few remedies for the Bank’s middle-aged infirmities.”

The first remedy: STOP COUNTING THE CONSUMPTION OF NATURAL CAPITAL AS INCOME. When the Philippines permits its forests to be carried off as logs to Japan, its balance of payments looks good, for a few years. When Indonesia sells off its oil, when the U.S. fishes its great cod populations down to remnants, the economy booms, until the resource is gone. That kind of behavior breaks the most time-honored economic law, which is to take this year only what will leave intact the capacity to produce the same amount next year.

Don’t spend down your capital. Every economist knows that. The problem is that economists have never counted soils, forests, clean water, clean air, mines, oil wells, or other species as capital. These resources are income-producing; indeed without them there would be no income. But we have no accounting systems to keep track of natural capital.

The Bank is playing a pioneering role in “greening the GNP” — adding natural resources to national accounting systems. The Bank should also, said Daly, count the loss of natural capital when calculating whether to fund a dam or a road. Not to do so means biasing Bank projects toward unsustainable development.

The Bank should also correct balance-of-payments accounts when natural capital such as timber or petroleum is exported. Those exports are now counted as foreign exchange income. They should be counted as capital transfers. If they were, international lending and national development policy would change enormously.

Two: TAX LABOR AND INCOME LESS; TAX THROUGHPUT MORE. Throughput means flows of energy and materials from the earth, through the economy, and back in the form of waste to the earth. It makes no sense, said Daly, to tax what you want more of (income, capital gains) instead of what you want less of (depletion, pollution). Given that we have to tax something, we should tax energy and material extraction and pollution emission, not income..

The North should take this step first, Daly said. “Indeed, sustainable development must be achieved in the North first…. The major weakness of the World Bank’s ability to foster environmentally sustainable development is that it only has leverage on the South…. Some way must be found to push the North.”

Three: MAXIMIZE THE PRODUCTIVITY OF NATURAL CAPITAL AND INVEST IN INCREASING IT. Economists don’t have to be told that the smartest way to invest is to find the most limiting factor in an economy or economic process — the factor that is most strained, the one that is holding back production — and find a way to use that factor more efficiently or to get more of it.

What economists do have to be told is that in many places the limiting factor is no longer labor or manmade capital. It is natural capital. “The fish catch is limited not by the number of fishing boats, but by the remaining fish in the sea. Cut timber is limited not by the number of sawmills, but by the standing forests.” That realization is slow to come partly because of inadequate accounting, and partly because so many economists were trained in a half-empty world where nature was abundant. They haven’t yet adjusted to a world where nature is suddenly very limiting.

Daly’s fourth suggestion: MOVE AWAY FROM THE IDEOLOGY OF FREE TRADE AND FREE CAPITAL MOBILITY AND TOWARD NATIONAL PRODUCTION FOR INTERNAL MARKETS. “At present global interdependence is celebrated as a self-evident good. The royal road to development … is thought to be the unrelenting conquest of each nation’s market by all other nations…. It is necessary to remind ourselves that the World Bank exists to serve the interests of its members, which are nation states. It has no charter to serve the cosmopolitan vision … of converting many relatively independent national economies into one tightly integrated world economic network, upon which the weakened nations depend for even basic survival.”

Globalizing the economy means erasing much of the power of national governments to carry out policies for the common good. Any protection of local businesses, of workers, of communities, or of the environment can be struck down as a restraint of trade — as if trade were the highest value, to which all other values must be sacrificed. “Take it as a prediction,” said Daly. “Ten years from now the buzz words will be ‘renationalization of capital’ and ‘community rooting of capital.'”

How did the Bank audience react to all this heresy? “Much better than I had hoped,” says Daly. “Maybe it’s wishful thinking, but I think the first two suggestions, with time, will certainly be followed. The third is more debatable, but I’m confident of it in the longer run. It’s going to be a real battle for the fourth.”

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The mission of the Donella Meadows Project is to preserve Donella (Dana) H. Meadows’s legacy as an inspiring leader, scholar, writer, and teacher; to manage the intellectual property rights related to Dana’s published work; to provide and maintain a comprehensive and easily accessible archive of her work online, including articles, columns, and letters; to develop new resources and programs that apply her ideas to current issues and make them available to an ever-larger network of students, practitioners, and leaders in social change. Read More

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